Column: Fixing manufacturing

Written by Vidya Mahambare | Vidya Mahambare | Updated: Feb 4 2014, 09:05am hrs
The year 2013 was another dismal year for Indian manufacturing. Manufacturing output fell by 0.6% between April-November 2013 compared to a year earlier and its share in GDP has now fallen for the third consecutive year to below 15%.

In fact, since 1980, the manufacturing to GDP ratio has been stuck in a narrow 14-16.5% band. That manufacturing never took off in a big way in India is well-known. Less analysed, however, are the regional dynamics that will be needed to achieve the key objective envisaged under the National Manufacturing Policyraising manufacturings share in GDP to 25% by 2022.

At the sub-national level, what then are the likely trends in manufacturing activity in the coming years And what do they imply for the ambitious targets under the policy

There are three major states where the manufacturing-to-GDP ratio is higher than the all-India averageMaharashtra, Tamil Nadu and Gujarat. In Maharashtra and Tamil Nadu, the share of manufacturing in the economy peaked in the mid-1990s. In Gujarat, the share of manufacturing in its GDP was around the national average of 15% in 1980, but nearly doubled to 29% by 2006-07.

In fact, were it not for the rapid rise of manufacturing activity in Gujarat, the share of manufacturing in Indias GDP would have fallen much lower by now.

Gujarats share in Indias manufacturing GDP, which was around 7.7% at the end of 1980s, rose to nearly 14% in 2011-12.

But now, the share of manufacturing in GDP has stopped growing in both Gujarat and Maharashtra. Manufacturing has also expanded slower than the rest of the economy in Tamil Nadu since the mid-1990s, except in a very recent period.

It is not surprising that services activity in these states is now expanding at a faster pace than manufacturing. As the economy develops and incomes rise, the demand for servicestransport and communication, hotels and restaurants, education and healthbegins to rise rapidly. Also, as education and skills develop, skill-based services such as IT/ITeS and financial services begin to grow.

At the same time, manufacturing in both Maharashtra and Gujarat will get a boost from major industrial zones planned over the coming yearsthe Delhi-Mumbai industrial corridor and the Mumbai-Bangalore industrial corridor.

However, what is critical to raise the share of manufacturing in GDP significantly is a jump in manufacturing activity in states of Bihar, Uttar Pradesh (UP) and West Bengal. In 1980, just like in Gujarat, the manufacturing to GDP ratio in West Bengal was close to 15%, the national average. Since then, it has fallen to 10%. In Bihar, the share of manufacturing in GDP has fluctuated between a mere 4% and 7% since the 1980s. Likewise, in UP, it has moved up only marginally to around 14% now from 11% in mid-1980s.

A rise in manufacturing in these three states is also imperative from a social standpoint; over this decade, they will together account for around one-third of Indias working age population. Creating sufficient employment opportunities for so many people will be difficult without the expansion of the manufacturing base. While it is true that manufacturing processes are becoming increasingly automated, the sector nonetheless can generate significant employment and income opportunities. In its absence, the pressure on migration to other states will only rise.

So, is this transformation feasible

Four pre-conditions need to be met, especially in Bihar and UP, if the manufacturing expansion is to take place: assured power supply, easy acquisition of land, good road infrastructure, and fast-tracked, corruption-free project approvals. Substantial progress is necessary on these fronts to lift manufacturing activity in these states.

Lastly, what if we are unable to raise the share of manufacturing in GDP

In a recent essay, famous development economist Dani Rodrik suggested that one of the perils of premature industrialisation was that incomes in developing countries such as India, which have turned into service economies without going through the phase of sufficient industrialisation, would settle at substantially lower levels vis--vis developed countries.

According to him, when the countries such as the US and Britain began to de-industrialise, their per-person

incomes had reached $9,000-11,000 (at 1990 prices). In developing countries, by contrast, manufacturings share in GDP has begun to fall while per capita incomes have been much lower: Brazils de-industrialisation began at $5,000, Chinas at $3,000, and Indias at $2,000.

Why will an economy dependent on services at the early stage of development remain relatively poor For two reasons. First, employment intensity in services is significantly lower than in manufacturing; while the share of services in GDP is close to 58%, its share in employment is around 35%. Second, developing countries such as India have low stock of human capital, so the expansion of services mostly takes place in relatively low value-added, low skill-dependent services compared to manufacturing activity.

The message is clear: for India to raise the manufacturing share in GDP, relatively less developed states will have to play their part and provide a conducive environment for manufacturing growth.

The author is principal economist, CRISIL